pe

Silver Lake plans to announce on Tuesday that it has closed its fifth buyout fund at $15 billion, one of the biggest ever dedicated to technology deals. That exceeds the $12.5 billion fund-raising target that the firm had previously aimed for and brings the firm’s total assets and committed capital to about $39 billion.

They seem to get good returns:

Silver Lake’s fourth fund, with $10.5 billion under management, currently boasts returns of nearly 31 percent, according to the data provider PitchBook.

What this means is that more older, lower growth software companies will be taken private. More than likely, their day-to-day operations will be optimized to get their cash-flow fixed up and increase profits. These companies can then act as cash machines and find some exit after the PE owners “fix” management and operations problems at the company.

That usually means consolidation, which results in firing people, but also fixing stubborn “frozen middle” problems that have preventing each product line from evolving and getting a better ongoing product/market for, meaning: being something that customers want to use and keep buying. There can also just be a lot of “bloat” in older product lines, esp. when it comes to effective product management, marketing, and developers following old, slow, but comfortable processes.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing ones have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital and TA Associates announced as many deals in Q1 2017 as each of the firms would typically print in an entire year. Additionally, both Vista Equity Partners and Thoma Bravo averaged almost two transactions per month in Q1, if we include deals done by their portfolio companies as well.

“The whole entire space is going through a transformation to cloud computing, and it feels like the entire industry is for sale,” Orlando Bravo, a managing partner at [Thoma Bravo], said in a telephone interview.

More:

“The firm, Thoma Bravo, said on Monday that it had closed its 12th fund at $7.6 billion, which surpassed an initial target of about $7 billion because of high investor demand.”

Qlik is one of the more recent buys, for $3bn. Trefis did some good, brief coverage noting that Qlik had a loss for the past three years likely due to the usual focus on top-line revenue growth, that is “due to high Selling, General and Administrative (SG&A) and R&D expenses.”

One would expect the usual course of PE “optimizing,” getting rid of those staff and scaling by coasting on the brand name of steady drip of new features. That is, you move a hockey-stick of expensive growth to a more leisurely hill and take out profits, cleaning up shop to be sold off to someone else who’ll make that hill into a plateau.

This week we discuss Rackspace going private and the OpenStack cloud scenarios that could have been. We also cover Matt Ray’s first trip to New Zealand where, sadly, he finds no Power Ranger monuments. Also, a little bi-modal flavor for ya.

Check out the full show notes (https://cote.io/sdt70) for links to the recommendations, conferences, and tech news items we didn’t get to cover.

BONUS LINKS! Not Covered in show

AWS Sentinel is Coming

“MSPs need to work with customers to convert their infrastructure to Platform-as-a-Service using microservices architecture,” said one AWS partner. “They also need to bring DevOps into the heart of the organization. Unfortunately, most MSPs don’t have the developers that truly understand this.”

Competing against AWS is hard, plus the other mega public cloud plays: “Google’s parent, Alphabet Inc., Amazon and Microsoft have combined cash holdings of more than $200 billion compared to Rackspace’s less than $1 billion.”

Brenon at 451 points out that Rackspace throws off a good amount of cash, “$674m of EBITDA over the past year,” and concludes:

More from Brenon: “While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.”

The MQ says “Rackspace has successfully pivoted from its ‘Open Cloud Company,’ OpenStack-oriented strategy, and returned to its roots as “a company of experts emphasizing its managed service expertise and superior support experience.”

Also: “Rackspace will continue to divert investment from its Public Cloud to other areas of its business, rather than try to compete directly for self-managed public cloud IaaS against market-leading providers that can rapidly deliver innovative capabilities at very low cost, or against established IT vendors that have much greater resources and global sales reach.”

Over the last decade, through a series of successful moves, Icahn has become the sole force behind Icahn Enterprises LP, a diversified holding company that puts him in command of roughly $24 billion in capital. “As essentially the wealthiest individual hedge-fund manager of all time, he is in an extremely rare position,” explains Brown. “Nobody can tell him what to do or what not to do.”
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“Tech companies have gotten away for far too long with far too much cash on their balance sheets,” says Kedrosky. “I applaud Carl for forcing people to think hard about why they are carrying so much, and for pushing them to return some of it to investors.”

Indeed, the numbers may back him up—cloud computing sure seems to be squeezing the vendor’s hardware business. The most recent evidence is clear: In Q3 2013, IBM’s systems revenue fell 19 percent, with its Power line falling 38 percent, System x sliding 18 percent and storage falling 11 percent. Among its hardware platforms, only System z mainframe server products showed some life, with a 6 percent uptick.

That former Sybase CEO, John Chen, did a good turn around job at Sybase a company that was similarly in the wrong side of market disruption but had deep enterprise but in.

Moore profile that turn around in Escape Velocity (an excellent book on the topic of reviving flatlined tech companies): he took Sybase from a $2.2B market cap to a $5.8B acquisition by SAP in three years.

With a short, but pretty good overview of who ValueAct is. PE firms are getting all up in aging software companies: I’m tapping away at a slightly longer commentary on that: it feels like the next few years will see a lot of private equity getting all up in tech companies grits, esp. as the next wave of companies take over, leaving the current kings disrupted with lots of value “locked” in organizations that “blew it.”